Kelly Services, Inc. 2014 Form 10-K Summary
Business context and reporting period
Kelly Services is a global workforce-solutions provider offering commercial and professional/technical staffing, outsourcing, consulting, recruitment, payroll and talent-supply-chain services across the Americas, EMEA and APAC. The filing covers the 52-week fiscal year ended December 28, 2014, with quarterly information for the fourth quarter included. The company assigned approximately 555,000 temporary employees during 2014 and served 97 of the Fortune 100 companies.
Operations are reported through Americas Commercial, Americas Professional and Technical, EMEA Commercial, EMEA Professional and Technical, APAC Commercial, APAC Professional and Technical, and Outsourcing and Consulting Group segments. Beginning in 2014, project-based legal services were reclassified from Americas PT to OCG, and prior periods were recast.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue from services | $5,562.7 million | $5,413.1 million | 2.8% increase; 3.8% constant currency |
| Gross profit | $908.4 million | $889.5 million | 2.1% increase |
| Gross profit rate | 16.3% | 16.4% | 10-basis-point decline |
| SG&A expenses | $886.5 million | $834.5 million | 6.2% increase |
| Earnings from operations | $21.9 million | $53.3 million | 59.1% decrease |
| Return on sales | 0.4% | 1.0% | 0.6-point decline |
| Net earnings | $23.7 million | $58.9 million | 59.8% decrease |
| Diluted earnings per share | $0.61 | $1.54 | Decrease |
| Dividends per share | $0.20 | $0.20 | Unchanged |
Revenue growth was led by OCG, which increased 15.2% to $586.8 million, with growth in contingent workforce outsourcing, recruitment process outsourcing and business process outsourcing. Americas revenue increased 1.5%, EMEA increased 2.6%, and APAC increased 2.5%.
Operating earnings declined despite higher revenue because SG&A excluding restructuring charges increased 5.0%, reflecting investments in professional/technical staffing, OCG, recruiting, sales and technology. Restructuring charges were $12.0 million in 2014 versus $1.6 million in 2013. The company recorded no asset impairment in 2014, compared with $1.7 million in 2013.
Cash flow, liquidity and debt
| Metric | 2014 | 2013 |
|---|---|---|
| Cash and equivalents at year-end | $83.1 million | $125.7 million |
| Net cash used in operating activities | $70.0 million | Net cash provided of $115.3 million |
| Net cash used in investing activities | $27.2 million | $20.8 million |
| Net cash from financing activities | $56.6 million | Net cash used of $43.7 million |
| Capital expenditures | $21.7 million | $20.0 million |
| Total debt | $91.9 million | $28.3 million |
| Debt-to-total capital | 9.9% | 3.3% |
| Working capital | $428.1 million | $474.5 million |
Operating cash flow was adversely affected by revenue growth, a $155.4 million increase in trade accounts receivable, extended payment terms for certain large customers, and timing differences involving OCG supplier payments. Trade accounts receivable reached $1.1 billion, and fourth-quarter global days sales outstanding increased to 54 days from 52 days.
At year-end, the company had $199.6 million of unused capacity under its $200.0 million revolving credit facility and $7.5 million of remaining capacity under its $150.0 million securitization facility. The securitization facility included $88.0 million of borrowings and $54.5 million of standby letters of credit for workers’ compensation. The company also had $15.5 million of unsecured, uncommitted local credit facilities, of which $3.5 million was borrowed. The company met all debt-covenant requirements during 2014.
Material changes versus the prior comparable period
- Revenue returned to growth after declining in 2013, increasing 2.8% reported and 3.8% on a constant-currency basis.
- OCG revenue increased 15.2% and represented 11% of total company revenue, compared with 9% in 2013.
- Americas revenue grew modestly, but Americas operating earnings declined 15.9% to $88.7 million as planned investments increased SG&A.
- EMEA operating earnings increased 5.5% to $12.1 million despite a lower gross profit rate.
- APAC operating earnings declined 11.0% to $2.5 million, while its gross profit rate fell 1.1 percentage points.
- SG&A increased faster than gross profit, reducing operating leverage and return on sales.
- The company generated negative operating cash flow in 2014 versus strong positive operating cash flow in 2013, primarily because of working-capital investment in receivables.
- Debt increased substantially, principally because of $60.0 million of additional securitization-facility borrowings used to fund operations.
- The U.S. work opportunity tax credit program expired at the end of 2014. Management stated that renewal was uncertain and noted that the program had generated approximately $16 million of annual credits over the prior three years.
Guidance, outlook, management commentary, risks and unusual items
Management described the 2015 outlook as encouraging, based on expected steady improvement in the U.S. economy, improving labor-market conditions and stronger customer confidence. The company expects revenue growth and profitability to accelerate in 2015, particularly in Americas PT and OCG, assuming continued economic growth and demand for temporary and professional labor. Management’s long-term return-on-sales goal is 4.0%, compared with 0.4% in 2014.
The 2014 management simplification plan was completed in the fourth quarter. It closed or consolidated 52 U.S. branches, simplified large-account delivery, reduced headquarters operations and eliminated 112 permanent positions. Total restructuring charges were $12.0 million, including $9.9 million for the plan. Management expects the plan to reduce future SG&A expense growth by approximately $35 million, with no additional plan-related charges expected.
Healthcare coverage was offered to eligible employees under the Affordable Care Act employer mandate. Management stated that initial price increases appeared sufficient to cover implementation and operating costs, but future compliance costs and penalties remain uncertain.
- Key risks include intense competition and pricing pressure, economic cyclicality, loss of large customers, availability of qualified temporary and permanent personnel, foreign currency fluctuations and international regulation.
- The company is exposed to employment-related claims, wage-and-hour matters, workers’ compensation, healthcare costs, tax and unclaimed-property audits, cyberattacks, data-privacy requirements and reliance on third-party technology and service providers.
- Most customer contracts may be terminated on short notice, and a major customer bankruptcy could materially affect revenue, earnings and working-capital liquidity.
- The company self-insures or retains significant exposure for workers’ compensation, disability and medical claims. Net workers’ compensation accruals were $57.6 million at year-end 2014.
- Goodwill totaled $90.3 million and was not impaired in 2014. The company stated that estimated fair values exceeded carrying values by more than 25% for the four reporting units tested quantitatively.
- A Louisiana litigation matter was resolved in January 2015 through an agreement with the excess insurer, eliminating further financial risk to Kelly. The company expected to reduce its litigation accrual and related insurance receivable by $1.7 million in the first quarter of 2015.
- Contractual obligations totaled $449.9 million, including operating leases of $94.8 million, short-term borrowings of $91.9 million, accrued retirement benefits of $152.6 million and purchase obligations of $25.9 million.
- Internal controls over financial reporting were deemed effective by management and PricewaterhouseCoopers LLP, which issued an unqualified audit opinion.
Most important facts for an investor to verify
- Whether the investments in Americas PT and OCG produce the expected 2015 revenue growth and operating-margin improvement.
- Whether the restructuring plan delivers the projected approximately $35 million reduction in future SG&A expense growth.
- Whether operating cash flow normalizes as receivables growth and customer payment terms stabilize.
- Available borrowing capacity, covenant compliance and the company’s dependence on the securitization facility to fund working capital.
- The renewal or expiration effects of the U.S. work opportunity tax credit and the net cost of Affordable Care Act compliance.
- Trends in global days sales outstanding, allowance for doubtful accounts and customer concentration, including the largest customer’s approximately 5% share of 2014 revenue.
- Developments in workers’ compensation, employment litigation, tax audits, data security and other regulatory exposures.
- The governance implications of the dual-class structure: Class A shares have no general voting rights, while Terence E. Adderley and related trusts control approximately 93% of Class B voting stock.